Operations Management 6Th Canadian Edition By William - Test Bank

Operations Management 6Th Canadian Edition By William – Test Bank

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Sample Questions Are Posted Below

Chapter 05

Strategic Capacity Planning

True / False Questions

The term capacity is the upper limit on the workload an operating unit can handle.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-01 Capacity, Measures, Efficiency, Utilization, and Effective Capacity

Capacity decisions are always long-term decisions.
FALSE

If a company produces a variety of outputs, capacity has to be expressed as several partial measures; no overall measure of capacity is possible.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

Capacity decisions often involve a long-term commitment of resources which, when implemented, are difficult or impossible to modify without major added costs.
TRUE

Stating capacity in dollar amounts generally results in a consistent measure of capacity.
FALSE

Design capacity refers to the maximum output rate under ideal conditions.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

Design capacity refers to the maximum output rate possible given a product mix, operating hours, and machine maintenance.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

Efficiency is defined as the ratio of actual output to effective capacity.
TRUE

As utilization increases the number of jobs/people waiting in an operating system decreases.
FALSE

Facilities are a major factor influencing effective capacity.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

The more uniform the mix of products being produced, the more opportunity there is to increase the effective capacity of the system.
TRUE

Evaluation of capacity alternatives involves economic calculations only.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Describe the strategic capacity planning process in organizations; know long-term demand patterns and calculate capacity requirements; and discuss major considerations for developing capacity alternatives.
Topic: 05-07 Major Considerations for Developing Capacity Alternatives

As forecasts are usually only accurate for the short term, forecasts are not useful in long-term capacity decisions.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Describe the strategic capacity planning process in organizations; know long-term demand patterns and calculate capacity requirements; and discuss major considerations for developing capacity alternatives.
Topic: 05-04 Strategic Capacity Planning Process in Organizations

Capacity increases are usually acquired in fairly large “chunks” rather than smooth increments.
TRUE

In break-even analysis, costs that vary directly with volume of output are referred to as fixed costs because they are fixed to the level of output.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Describe the break-even analysis approach for evaluating capacity alternatives; and use it to solve problems.
Topic: 05-09 Evaluating Alternatives

The break-even quantity can be determined by dividing the fixed costs by the difference between the revenue per unit and the variable cost per unit.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Describe the break-even analysis approach for evaluating capacity alternatives; and use it to solve problems.
Topic: 05-09 Evaluating Alternatives

Among the assumptions of break-even analysis is that the variable cost per unit remains the same regardless of quantity of output.
TRUE

Strategic capacity planning is the systematic determination of facility and major machine/equipment requirements to meet long-term demand for goods, however, this does not apply to services.
FALSE

A simple method for estimating the throughput capacity of a productive unit from its size is to divide the size by the average time a product spends in the productive unit (this is called Littlele method ):
TRUE

Supply chain factors are not usually taken into account in capacity planning if substantial capacity changes are involved.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

Demand volatility tends to be higher for services than for goods, not only in timing of demand, but also in the amount of time required to service individual customers.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Describe the strategic capacity planning process in organizations; know long-term demand patterns and calculate capacity requirements; and discuss major considerations for developing capacity alternatives.
Topic: 05-08 Planning Service Capacity

Break-even analysis can also be used for make-or-buy decisions, and deciding between two or more capacity alternatives.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-03 Describe the break-even analysis approach for evaluating capacity alternatives; and use it to solve problems.
Topic: 05-09 Evaluating Alternatives

Multiple Choice Questions

Which is not true about long-term capacity?
A.Excess capacity can serve as a barrier to entry for other companies.
B. Capacity may be difficult and costly to modify.
C. Exceeding capacity minimizes operating costs.
D. Capacity affects the ability to satisfy customer’s demand.
E. Capacity is usually a major determinant of initial capital costs.

Which of the following is not an important long-term capacity decision consideration?
A.matching capacity and demand
B. commitment of resources
C. level of capacity and operation costs
D. ensuring capacity always exceeds demand to allow for forecasting errors
E. capacity affects ease of management

Capacity refers to the upper limit on the _______ an operating unit can handle.
A.inventories
B. workload
C. supplies
D. available time
E. finances

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-01 Capacity, Measures, Efficiency, Utilization, and Effective Capacity

The maximum output rate under ideal conditions is:
A.design capacity.
B. effective capacity.
C. actual output.
D. efficiency.
E. utilization.

The maximum possible output rate given a product mix, scheduling difficulties, operating hours, and so on, is:
A.utilization.
B. design capacity.
C. efficiency.
D. effective capacity.
E. available capacity.

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

Efficiency is defined as the ratio of:
A.actual output to effective capacity.
B. actual output to design capacity.
C. design capacity to effective capacity.
D. effective capacity to actual output.
E. design capacity to actual output.

Utilization is defined as the ratio of:
A.actual output to effective capacity.
B. used time to available time.
C. available time to effective capacity.
D. effective capacity to actual output.
E. design capacity to actual output.

The ratio of actual output to effective capacity is:
A.design capacity.
B. effective capacity.
C. actual capacity.
D. efficiency.
E. utilization.

Throughput capacity for a productive unit measured as a rate is:
A.actual output to effective capacity.
B. used time to available time.
C. available time to effective capacity.
D. effective capacity to actual output.
E. size of productive unit to average cycle time.

Given the following information, the efficiency is:
Effective capacity = 80 units per day
Design capacity = 100 units per day
Actual output = 72 units per day
A.50%
B. 64%
C. 72%
D. 80%
E. 90%

Given the following information, the efficiency is:
Effective capacity = 50 units per day
Design capacity = 100 units per day
Actual output = 30 units per day
A.40%
B. 50%
C. 60%
D. 80%
E. 90%

Given the following information, the efficiency is:
Effective capacity = 20 units per day
Design capacity = 60 units per day
Actual output = 15 units per day
A.25%
B. 33%
C. 50%
D. 75%
E. 80%

Which of the following is not a determinant of effective capacity?
A.Facilities
B. Product mix
C. Actual output
D. The workforce
E. External factors

Considerations in forecasting long-term demand do not include:
A.identifying demand trends
B. duration of demand trends
C. amplitude of demand cycles
D. the slope of the trend
E. exclusion from marketing input into the forecast

Which of the following is not a consideration for developing capacity alternatives?
A.Avoiding capacity cushions
B. Taking a big-picture approach to capacity changes
C. Preparing to deal with capacity in “chunks”
D. Attempting to smooth out capacity requirements
E. Identifying the optimal operating level

Seasonal variations are typically easier to deal with in capacity planning than random variations because seasonal variations tend to be:
A.smaller.
B. larger.
C. predictable.
D. controllable.
E. less frequent.

Production units have an optimal rate of output where:
A.total costs are minimum.
B. unit costs are minimum.
C. marginal costs are minimum.
D. rate of output is maximum.
E. total revenue is maximum.

Installing capacity before an increase in demand occurs is referred to as:
A.an incremental strategy.
B. a lagging strategy.
C. a leading strategy.
D. a capacity cushion.
E. a capacity chunk.

At the break-even point:
A.output equals capacity.
B. total cost equals total revenue.
C. total cost equals profit.
D. variable cost equals fixed cost.
E. variable cost equals total revenue.

An alternative will have fixed costs of $10,000 per month, variable costs of $50 per unit, and revenue of $70 per unit. The break-even point volume is:
A.143
B. 200
C. 350
D. 500
E. 600

For fixed costs of $1,000, revenue per unit of $1, and variable cost per unit of $0.80, the break-even quantity is:
A.1,000
B. 1,250
C. 2,250
D. 5,000
E. 6,000

Which of the following is not an accurate statement concerning break-even analysis?
A.The revenue per unit will be the same regardless of volume.
B. Costs related to production of a product are classified as fixed or variable
C. Variable cost per unit will be the same regardless of volume.
D. At quantities greater than the break-even point there is a loss.
E. All costs related to production of a product must be identified.

Which of the following is not an assumption of the break-even model?
A.One product is involved.
B. Everything that is produced can be sold.
C. Total variable cost is the same regardless of volume.
D. Fixed costs do not change with volume changes.
E. Revenue per unit is the same regardless of volume.

What is the break-even quantity for the following situation?
FC = $1,200 per week
VC = $2 per unit
Revenue (R) = $6 per unit
A.100
B. 200
C. 300
D. 600
E. 1200

The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $150 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $200.
If, for this machine, design capacity is 50 cords per day, effective capacity is 40 cords per day, and actual output is anticipated to be 35 cords per day, what would its utilization be?
A.100%
B. 80%
C. 75%
D. 70%
E. 0%

The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $150 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $200.
If, for this machine, design capacity is 50 cords per day, effective capacity is 40 cords per day, and actual output is expected to be 32 cords per day, what would be its efficiency?
A.100%
B. 80%
C. 75%
D. 70%
E. 0%

The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $150 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $200.
What would the potential profit be if he were to split 4,000 cords of wood with this machine?
A.$100,000
B. $150,000
C. $200,000
D. $600,000
E. $800,000

The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $150 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $200.
How many cords of wood would he have to split with this machine to break even?
A.1000
B. 500
C. 333
D. 250
E. 200

The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $150 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $200.
How many cords of wood would he have to split with this machine to make a profit of $50,000?
A.3000
B. 2000
C. 1500
D. 1000
E. 500

The owner of a greenhouse and nursery is considering whether to spend $12,000 to acquire the licensing rights to grow a new variety of rose bush, which she could then sell for $8 each. Variable costs would be $5 per rosebush.
If her available land has design and effective capacities of 3,000 and 2,000 rose bushes per year respectively, and she plans to grow 1,200 rosebushes each year on this land, what will be the efficiency of her use of this land?
A.0%
B. 40%
C. 60%
D. 67%
E. 100%

The owner of a greenhouse and nursery is considering whether to spend $12,000 to acquire the licensing rights to grow a new variety of rose bush, which she could then sell for $8 each. Variable costs would be $5 per rosebush.
If her available land has design and effective capacities of 3,000 and 2,000 rose bushes per year, respectively, and she expects to be 80% efficient in her use of this land, how many rosebushes does Rose plan to grow each year on this land?
A.1,600
B. 2,400
C. 3,000
D. 2,000
E. 1,000

The owner of a greenhouse and nursery is considering whether to spend $12,000 to acquire the licensing rights to grow a new variety of rose bush, which she could then sell for $8 each. Variable costs would be $5 per rosebush.
What would the profit be if she were to produce and sell 5,000 rose bushes?
A.$2000
B. $3,000
C. $5,000
D. $25,000
E. $40,000

The owner of a greenhouse and nursery is considering whether to spend $12,000 to acquire the licensing rights to grow a new variety of rose bush, which she could then sell for $8 each. Variable costs would be $5 per rosebush.
How many rose bushes would she have to produce and sell in order to break even?
A.1,500
B. 2,400
C. 3,000
D. 4,000
E. 6,000

The owner of a greenhouse and nursery is considering whether to spend $12,000 to acquire the licensing rights to grow a new variety of rose bush, which she could then sell for $8 each. Variable costs would be $5 per rosebush.
How many rose bushes would she have to produce and sell in order to make a profit of $6,000?
A.6,000
B. 4,000
C. 3,000
D. 2,400
E. 1,500

A recruiter for a job placement agency is considering whether to pay $50,000 per year to lease a new recruiting facility in a prime location in Washington D. C. He estimates it will cost $50 per recruit to process the paperwork at this new location. He receives a $75 commission for each new recruit he processes.
If the office space at this new location has design and effective capacities of 10,000 and 8,000 recruits processed annually, respectively, and 6,000 recruits will be processed per year, what will be the utilization of the office space?
A.50%
B. 60%
C. 75%
D. 80%
E. 100%

A recruiter for a job placement agency is considering whether to pay $50,000 per year to lease a new recruiting facility in a prime location in Washington D. C. He estimates it will cost $50 per recruit to process the paperwork at this new location. He receives a $75 commission for each new recruit he processes.
If his office space at this new location has design and effective capacities of 10,000 and 8,000 recruits processed annually, respectively, and he plans to be 90% efficient in his use of this space, how many recruits does he plan to process per year?
A.9,000
B. 8,000
C. 7,800
D. 7,200
E. 7,000

A recruiter for a job placement agency is considering whether to pay $50,000 per year to lease a new recruiting facility in a prime location in Washington D. C. He estimates it will cost $50 per recruit to process the paperwork at this new location. He receives a $75 commission for each new recruit he processes.
What would be his annual profit if he were to process 4,000 recruits per year at this new location?
A.$0
B. $50,000
C. $75,000
D. $100,000
E. $300,000

A recruiter for a job placement agency is considering whether to pay $50,000 per year to lease a new recruiting facility in a prime location in Washington D. C. He estimates it will cost $50 per recruit to process the paperwork at this new location. He receives a $75 commission for each new recruit he processes.
How many recruits would he have to process annually to break even at this new location?
A.8,000
B. 6,000
C. 5,000
D. 4,000
E. 2,000

A recruiter for a job placement agency is considering whether to pay $50,000 per year to lease a new recruiting facility in a prime location in Washington D. C. He estimates it will cost $50 per recruit to process the paperwork at this new location. He receives a $75 commission for each new recruit he processes.
How many recruits would he have to process annually to make a profit of $100,000 at this new location?
A.8,000
B. 6,000
C. 5,000
D. 4,000
E. 2,000

Doctor J. is considering purchasing a new blood analysis machine for $60,000. He estimates that he could charge $80.00 for an office visit to have a patient’s blood analyzed, while the variable cost of a blood analysis would be $30.00.
If this new blood analysis machine has design and effective capacities of 6,000 and 5,000 blood analyses per year, respectively, and Dr. J. expects to perform 4,500 blood analyses each year, what will be the utilization of this machine?
A.0%
B. 75%
C. 83%
D. 90%
E. 100%

Doctor J. is considering purchasing a new blood analysis machine for $60,000. He estimates that he could charge $80.00 for an office visit to have a patient’s blood analyzed, while the variable cost of a blood analysis would be $30.00.
If this new blood analysis machine has design and effective capacities of 6,000 and 5,000 blood analyses per year, respectively, and Dr. J. expects to be 80% efficient in his use of this machine, how many blood analyses does he plan to perform each year?
A.3,200
B. 4,800
C. 4,000
D. 1,000
E. 5,000

Doctor J. is considering purchasing a new blood analysis machine for $60,000. He estimates that he could charge $80.00 for an office visit to have a patient’s blood analyzed, while the variable cost of a blood analysis would be $30.00.
What would be his profit if he were to perform 5,000 blood analyses?
A.$100,000
B. $150,000
C. $190,000
D. $300,000
E. $400,000

Doctor J. is considering purchasing a new blood analysis machine for $60,000. He estimates that he could charge $80.00 for an office visit to have a patient’s blood analyzed, while the variable cost of a blood analysis would be $30.00.
How many blood analyses would he have to perform in order to break even?
A.3,000
B. 2,400
C. 2,000
D. 1,200
E. 750

Doctor J. is considering purchasing a new blood analysis machine for $60,000. He estimates that he could charge $80.00 for an office visit to have a patient’s blood analyzed, while the variable cost of a blood analysis would be $30.00.
How many blood analyses would he have to perform in order to make a profit of $50,000?
A.2,200
B. 2,000
C. 1,200
D. 625
E. 500

Which of the following is not a common long-term demand pattern?
A.Growth
B. Maturity
C. Decline
D. Cyclical
E. Stable

When demand is variable, capacity is usually chosen above the average (forecast) demand. The excess of capacity over the average demand is called capacity cushion or _______.
A.Capacity excess
B. Marginal capacity
C. Design capacity
D. Safety capacity
E. Effective capacity

Break-even analysis focuses on the relationship between three values. What are the three values?
A.Profit, volume, utilization
B. Costs, utilization, efficiency
C. Efficiency, capacity, velocity
D. Revenue, profit, utilization
E. Costs, revenue, volume

In break-even analysis with step fixed cost what must be considered when making the final decision?
A.Forecast demand
B. Fixed costs
C. Variable costs
D. Variation in the fixed costs
E. Step costs

What is the term used to define the length of time it will take for an investment to return its original cost.
A.Break even time
B. Investment horizon
C. Payback
D. Break even term
E. Break-even point in dollars

The utilization of an operation is .90 and it is .87 efficient. If the quality ratio is .98 what is the overall equipment effectiveness?
A.0.567
B. 0.667
C. 0.767
D. 0.870
E. 0.98

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

The utilization of an operation is .95 and it is .93 efficient. If the quality ratio is .95 what is the overall equipment effectiveness?
A.0.678
B. 0.768
C. 0.810
D. 0.825
E. 0.839

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

Machine #1 has total annual fixed cost of $8,500 and a corresponding range of output of 0 to 300. Machine #2 has total annual fixed cost of $10,000 and a corresponding range of output of 301 to 600. Machine #3 has total annual fixed cost of $15,000 and a corresponding range of output of 601 to 900. Variable cost is $10 per unit and revenue is $40 per unit. What is the break-even point for each machine?
A.200, 300, 450
B. 233.33, 300, 433.37
C. 255, 320, 466.67
D. 283.33, 333.33, 500
E. 350, 550, 750

Machine #1 has total annual fixed cost of $9,800 and a corresponding range of output of 0 to 300. Machine #2 has total annual fixed cost of $15,000 and a corresponding range of output of 301 to 600. Machine #3 has total annual fixed cost of $20,000 and a corresponding range of output of 601 to 900. Variable cost is $15 per unit and revenue is $40 per unit. What is the break-even point for each machine?
A.225.33, 455, 500
B. 392, 600, 800
C. 433.33, 567.67, 700
D. 392, 567.67, 767.67
E. 392, 600, 767.67

Short Answer Questions

The efficiency of a productive unit is 60%. The unit produces an average of 20 forklift trucks per day. Determine the effective capacity of the unit.

Efficiency =

Thus 60% =

Solving for effective capacity yields 33.33 forklift trucks per day.

Difficulty: Medium
Learning Objective: 05-01 Define capacity; explain the importance of long-term capacity; know how to measure capacity; understand two related performance measures; know overall equipment effectiveness; and describe factors influencing effective capacity.
Topic: 05-03 Measuring Capacity and Some Related Performance Measures

The utilization of a machine is 50%. The machine has a design capacity of 70 units per hour and an effective capacity of 60 units per hour. Find the efficiency of the machine.

First, solve for actual output using the utilization formula.
Utilization = : 50% =

Thus actual output = 35 units per hour.
Using the efficiency formula:

Efficiency = = = 58.33%

An investment proposal will have annual fixed costs of $60,000, variable costs of $35 per unit of output, and revenue of $55 per unit of output.
(i) Determine the break-even quantity.
(ii) What volume of output will be necessary for an annual profit of $60,000?

FC = $60,000 per year
vc = $35 per unit
Rev – $55 per unit
Q_BEP = = = 3,000 units

Q_BEP = = = 6,000 units

Difficulty: Medium
Learning Objective: 05-03 Describe the break-even analysis approach for evaluating capacity alternatives; and use it to solve problems.
Topic: 05-09 Evaluating Alternatives

A firm is considering three capacity alternatives: A, B, and C. Alternative A would have an annual fixed cost of $100,000 and variable costs of $22 per unit. Alternative B would have annual fixed costs of $120,000 and variable costs of $20 per unit. Alternative C would have fixed costs of $80,000 and variable costs of $30 per unit. Revenue is expected to be $50 per unit.
(i) Which alternative has the lowest break-even quantity?
(ii) Which alternative will produce the highest profits for an annual output of 10,000 units?
(iii) Which alternative would require the lowest volume of output to generate an annual profit of $50,000?

	(i)	(ii)	(iii)
FC	$100,000	$120,000	$80,000
Vc	22	20	30
Rev	50	50	50

(i) Q_BEP = A: 3,572; B: 4,000; C: 4,000
(ii) Profit = Q(rev – vc) – FC. Q = 10,000. A: $180,000; B: $180,000; C: $120,000.
(iii) Q = . SP = $50,000. A: 5,358; B: 5,667; C: 6,500

Difficulty: Medium
Learning Objective: 05-03 Describe the break-even analysis approach for evaluating capacity alternatives; and use it to solve problems.
Topic: 05-09 Evaluating Alternatives

A small business owner is contemplating the addition of another product line. Capacity increases and equipment will result in an increase in annual fixed costs of $50,000. Variable costs will be $25 per unit.
(i) What unit selling price must the owner obtain to break-even on a volume of 2,500 units a year?
(ii) Because of market conditions, the owner feels a revenue of $47 is preferred to the value determined in part a. What volume of output will be required to achieve a profit of $16,000 using this revenue?

FC = $50,000 per year
Vc = $25 per unit

(i) Q_BEP = = 2,500 units. Solving for Rev: $45 per unit
(ii) Rev. = $47, specified profit = $16,000.

Profit = Q(Rev – ve) – FC. Solving for Q: 3,000 units per yr.

Difficulty: Medium
Learning Objective: 05-03 Describe the break-even analysis approach for evaluating capacity alternatives; and use it to solve problems.
Topic: 05-09 Evaluating Alternatives

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What is the anticipated utilization?

80%

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What is the anticipated efficiency?

90%

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What is the break-even quantity (produced and sold)?

[25,000 units]

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What are total revenues for the break-even quantity?

$40,000

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What are total costs for the break-even quantity?

$40,000

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What quantity would be required for a profit of $2,000?

28,334 units

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What profit (loss) would there be for a quantity of 27,000?

$1,200

Fixed costs:	$15,000.00
Variable costs:	$1.00 per unit
Revenue:	$1.60 per unit
Design capacity:	45,000 per unit
Effective capacity:	40,000 units per year
Anticipated output:	36,000 units per year

What profit (loss) would there be for a quantity of 10,000?

$9,000 loss

Operations Management 6Th Canadian Edition By William - Test Bank

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Operations Management 6Th Canadian Edition By William - Test Bank

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